Owning a home is supposed to be the main route to the American Dream. Anything less, renting a house or apartment, for instance, is an indication of failure, malfeasance, communism and financial ruin. Right? Well, no, not right. That belief, held by an astounding number of Americans (the Grumbys fell for it too), fails to account for so many factors it makes my few remaining hair follicles stand on end. I took this advice like it was free beer, gulping it eagerly without pausing to notice the hoppy, floral aroma and crisp, slightly bitter finish. Ok, maybe I should get off of the beer analogy. What I mean is, I accepted this premise, like most people, without slightest bit of analysis or skepticism. “Renting is just throwing money away”, they say. “You need to build equity and invest your money in a house!”.
You know what I say? Bullsh*t. Why do I say that? Partially because of questionable upbringing, but mostly because that philosophy is fundamentally wrong. Why wouldn’t you look at pros and cons and do the math before burdening yourself with hundreds of thousands of dollars of debt and an incredibly non-liquid asset?
Downsizing our home, Upsizing our American Dream
In July of 2015 we sold our cozy, charming 101-year old northeast Portland bungalow and moved in to an apartment in a brand new complex near downtown Portland, thereby dooming us to a life of financial ruin, scandal and boredom (well, according to some anyways). Rather than celebrating our brilliance, people were puzzled and horrified by our decision. Why would we leave a great neighborhood, where property values were rising by the minute and hoards of beautiful, wealthy people in enormous SUVs couldn’t wait to plunk ridiculous money down sight unseen to get in on the action? Were we brainwashed? Did we join a cult? Look for answers to these and other questions below.
Why would we leave a great neighborhood filled with beautiful, wealthy people?
The house appreciated substantially during the nine years we were there together, and because of an insanely inflated housing market we were fortunate to sell to a cash buyer for $67k over asking price. So your first response might be, ‘Hey wait! You’re saying a house isn’t an investment, but you made out like bandits!”.
Did we really make out like bandits? Let’s take a look at the numbers and watch the American Dream meet reality.
They said there would be no math
The purchase price was $250,000 in 2004. We sold the house for $476,000 in 2015, for a difference of $226,000. Most people stop here and celebrate their exceptional luck and real-estate investment acumen by buying an even more expensive house. But wait! There is some required math before we gloat over what would appear to be a quarter-million dollar profit. What about the money spent on the house while we owned it? You have to count that. Here are some, but not all, of our expenses over the years:
- New furnace, plumbing, air conditioner: $9,500
- Appliances: $2,400
- Radon mitigation, chimney repair, new water heater: $3,500
- Paint, new floors, kitchen remodel, bathrooms, basement remodel: $20,000
- Staging expense: $3,000
- Property taxes from 2005-2015: $25,000
- Mortgage interest: $57,000
- Sales Commission: $25,600
Total Expenses: $146,000
Tax Benefits (mortgage interest and property tax deductions): $25,000
Proceeds from the sale: $226,000
$226,000+$25,000 (tax benefits) -$146,000 (Expenses) = $105,000 profit. But wait! There was a $75,000 mortgage balance, so after deducting that our take away was $30,000, or about $2,727 per year of “investment” gains on a house that sold for $467,000. Pretty crappy, from a strictly financial perspective.
What if we had rented and invested for 10 years?
If we had invested the initial down payment of $112,000 without adding any additional payments, after 10 years, it would have grown to $237,359 at the S&P average return for that period of 7.8%. In addition, if we invested the $38,400 that we spent on home improvements (~$3,840/year) our little cash pad would have grown to $292,462. This would have happened silently in the background as we paid ~$1,500/month in rent over 10 years, or $180,000. Our resulting net profit in this parallel universe? $112,462! That’s $82,462 ahead of where we ended up after our initial buy into the “American Dream”.
It looks like owning a house, even in an inflated market like the one in Portland, isn’t a great investment. Home ownership as an asset and lifestyle choice did work well for us and our 3 non-human kids, but this review of the financial impact of our choice is a little, um, shocking.
So why we decide decide to sell?
Since neither one of us has the time, desire, or skill to tackle large home improvement projects on our own, we spent a significant amount of money hiring others to do the work for us:
- replacing hardwood floors (originals had been damaged in a fire)
- remodeling the kitchen, including removal of interior chimney of former oil furnace
- facelifts in both bathrooms
- Holy shit! Can’t you just see the dollars jumping out of our pockets?!
And if we had not gathered our wits, we were just about to embark on a $25k siding project and $80k to convert the detached garage into an apartment (for later rental income). As our friend Olivia would say, “Sweet Potato Jesus!!”
When we looked objectively at these upcoming projects, considering our lack of time, skills and interest in doing them ourselves, and, oh yeah, hello, basic math, we realized that the true life of financial ruin and delayed retirement would be staying in the house. We needed to get the hell out of there before we handed another Benjamin Franklin over to a contractor.
Mrs. Grumby’s post goes into more details about the physical downsizing part of the move.
Mr. Grumby answers the critics
Once people recovered from the shock of our horrifying and, um, shocking decision, there were questions. Here are a few of them. Note: Some might have been embellished for hilarity and brilliance.
Q. The American Dream is to own a house. Why would you sell your house and thereby relinquish your claim to any dreams, American or otherwise?
A. Owning a house or condo is fine if you enjoy the tasks and expenses associated with being an owner. Some people love that stuff, and good for them. My Grandpa, “Bud” was a fixer of all things, master woodworker, and an all around great guy. He was the perfect home owner. I am somewhat handy and can do minor repairs and projects, cut the grass and clean the gutters, but I would rather spend my off time doing other things, like riding my bike or watching Curb Your Enthusiasm. Mrs. Grumby and I might jump back into the housing market some day but not while we are working, and certainly not because we think we are going to strike it rich that way.
Q. Your house is an investment because it appreciates over the years.
A. Is that a question? A house that you live in is an asset. It will probably increase in value (not always), but that does not necessarily qualify it as an investment. In fact, housing barely beats inflation over the last 50 years. Appreciation of a house is completely dependent on the market, inflation, whether your neighbors store rusty appliances and large-block Chevy motors in their front yards, and other factors well outside of your control. In addition to the expenses outlined in the “Math” section above, you might have to repair your imported marble fountain, repave the driveway, buy a new water heater*, install new shag carpet, etc.
*Its not a “hot” water heater. Hot water needs no heating.
Q: Why are you giving up the tax benefits of owning a house? Do you like paying taxes?
A: Ha! Despite this common and incredibly inaccurate assertion, tax benefits are far outweighed by interest paid. Let’s say you borrow $300,000 for 30 years at 4%, the result is that you will pay $213,351 (!) in interest to your benevolent and charming banker. Great Googly Moogly! Your tax “savings” from paying that interest over that period of time is $53,902. So, while you may have stuck it to the government, you’re still out of pocket $159,449! Take that, government! A tax deduction is a nice ancillary benefit, but never a reason to buy a house. (Was that too many exclamation points!?)
Here is a fancy tax calculator so you can check my work.
Q. Rent is throwing money away.
A. No more than buying groceries is throwing money away. If you buy a box of frozen White Castles and eat them all, the result is that you received the benefit from eating the delicious White Castle. (Note: Others around you may not appreciate the fact that you ate six White Castles).
Where was I? Oh yeah. Like a mortgage payment, rent is a necessary expense for having a place to live. Our fairly high rent payment is more than offset by choosing to live in an area where car expenses can be avoided. The result? More freedom with fewer obligations, also known as the American Dream. Yes, renters are at risk for fluctuations in rent and other factors, but homeowners are at risk for major repairs, hillbilly neighbors and other uncontrollable events.
Take a look at this Rent vs. Buy vs. rent calculator: You can do your own math too.
Q: But don’t you want something that you can own?
A: We own two bicycles, a crapload of hiking and camping gear, some DVDs, a few bobbleheads, clothing, shoes, underbritches and a gargoyle. Oh, and a “cat”. Grumbycat is pretty needy, but the bikes require only minimal upkeep. And, although Mrs. Grumby is skeptical, I am pretty sure that my Sgt. Schultz bobblehead will appreciate in value and make us a bundle some day.
My sister, let’s call her Diane, and her “family”, and I mean that in a very Italian sense, own more stuff than the Smithsonian, but they use their stuff all the time, including their lake house, chicken coops, numerous children, and various motorized Ozark vehicles. TCB, the dental lab they own (motto: We’ll make you a smile you can’t refuse) is 8 miles down the road. They are the perfect example of people who should own a house because it fits their lives.
Q: But how can you live in such a small place? This is America! Where will you put your stuff?
A: Many years ago, I had so much crap that I had to PAY TO STORE IT BECAUSE I DIDN’T HAVE ROOM FOR IT AND WASN’T USING IT BUT I MIGHT USE IT SOME DAY!!!! What was I thinking??
Millions of people live happily in small apartments and houses. If you need more room for all of your extra stuff, you have too much stuff. Every tangible thing we own fits in the 670 square foot apartment. We do not have a storage unit, and we lack for nothing. It is noteworthy that Mrs. Grumby believes we have more than we need, but she doesn’t see the intrinsic, life changing value of the bobbleheads. Please enjoy this bit of wisdom about stuff from the late, great George Carlin.
Q: But what if the upstairs neighbors in your fancy apartment are hillbillies and make a bunch of noise while square dancin’ and makin’ moonshine?
A: We will go up there and tell them to quiet the hell down, or ask the management who will tell them to stop making so much noise. If that doesn’t work, we are only committed to our lease for one year. But, let me turn that question around: How are you going to sell your house if a family of fireworks-shooting, trash-burning-9:00 a.m.- beer-swilling hillbillies move in next door? If we don’t like our rental neighbors, we can leave at the end of the lease. You have to list your house with a disassembled Dodge Neon in your neighbors’ front yard.
Q: So are you saying I should not buy a house? Who do you think you are to tell be what to do?
A: I’m Mr. Grumby.
I’m saying do the math and consider your lifestyle and skill set instead of making a hasty decision. Owning is great for many and terrible for others. The premise “buying is good, renting is bad and that’s the end of it” is simplistic and, frankly, bullshit.
Owning a house does not necessarily result in achieving whatever the American dream might be. If you buy a house, do so because you want to stay there for awhile and not because you think it will make you a oodles (did I just say “oodles”?) of money. Because, with relatively few exceptions, it won’t. If you enjoy fertilizing the grass, gardening, paying interest, polishing the helipad, tending to the squirrel feeders, cleaning the roof, killing mole crickets and living in one place for a long time, then the American dream means home ownership for you. And that’s perfectly OK.
What the heck am I supposed to do now??
Before jumping into what could be either your American Dream or an enormous vat of financial muck, think about:
- How long will you be in the house? If you are staying put for awhile, buying might be the best choice.
- Do you like working in the yard, fixing things and cleaning gutters on your off time, or would you rather go hiking or watch a movie?
- Do you have liquid savings and enough cash flow to pay for unexpected repairs, new furniture, and still enjoy your life?
- Will you be able to save enough to retire when you are ready to leave the 9-5 grind in the dust? (If you’re still working, listen up! How long do you really want to work?)
So, what do you think? Am I full of crap? Is my posting the most astonishingly moving thing you have ever read? Do you disagree with me? Please comment below.